7.2.5.1 Directors’ duties

Before the introduction of the Companies’ Act 2006 the duties of directors were divided into a duty of loyalty (fiduciary duties) and duties of skill and care, which were both developed by the courts and were part of common law (Davies et al. 2008: 16.1). These two sorts of duties correspond to two risks owners or shareholders of a company run. The first risk is that an active board might not act in the best interest of the shareholders, which is also described in section 3.3 about the agency theory. And the second risk is that they are incompetent (Davies et al. 2008: 16.12). These two main duties are now codified in the Companies’ Act. Section 170 CA 2006 mentions seven specified duties that directors owe to the company, that cover these two general duties. The duty of skill and care can be found in section 174 CA 2006 about the duty to exercise reasonable care, skill and diligence. The following six sections are derived from the duty of loyalty:

The directors – executive directors as well as NEDs – owe these duties to the company and to its shareholders, but not to shareholders individually. Furthermore, the duties are not owed to stakeholder groups, but section 172 CA 2006 embodies the duty to promote the success of the company. This particular section provides that a ‘director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to – […] (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment […].’ However, the duties remain primarily owed to the company and its shareholders, while the interests of these other stakeholder groups must only be taken into account (Davies et al. 2008: 16.4-16.7; Andenas and Wooldridge 2009: 271).

In the remainder of this subsection, the duties relevant to the discussion about independence are described. The duty to exercise independent judgment is described first. Thereafter, the duty to avoid conflicts of interests, the duty not to accept benefits from third parties and the duty to declare interest in proposed transactions or arrangements are described together, because they are all related to conflicts of interest.